New Zealand Trust

An excellent vehicle for asset and tax planning

What is a foreign Trust?

A foreign trust is one where there has never been a New Zealand resident Settlor. (A “settlor” is usually the person who creates the trust by putting their personal assets into it).

A non-resident can settle a trust that has non-resident beneficiaries but has a New Zealand resident Trustee. These trusts can be trust-effective in certain offshore jurisdictions. However, such trusts are not treated as New Zealand trusts because New Zealand taxes trusts based on the residence of the Settlor, not the Trustee, as do other jurisdictions.

The Trustees are only taxable in New Zealand on income that has a New Zealand source. However, the Trustees will only be eligible for a tax-exemption on the Trust’s foreign-sourced income if they register the Trust with Inland Revenue.

Uses of private Trusts

Estate planning

The majority of people prefer to decide for themselves how their assets will be disposed of when they die. This is usually made in the form of a Last Will and Testament. A Trust allows more flexibility than a will and as such is an ideal medium for Estate Planning. This is achieved by appointing Trustees with powers stipulated in the deed of trust. In addition, for residents of certain countries, a Trust can be a useful vehicle for avoiding problems such as forced heirship.

Tax planning

One of the advantages of a trust is that it may be used as a means of mitigating or eliminating certain types of income, capital gains and inheritance taxes. A trust is a very personal matter and legal advice should be sought in relation to the settlors and beneficiaries’ personal circumstances. It is imperative that the Trust Deed is drafted carefully.

Avoiding disruption on death

A death can cause financial disruption, particularly if the death is sudden and unexpected. Probate can often be costly and involve publicity and considerable delay. A Trust created well in advance of death, with appropriate guidelines regarding the Settlor’s wishes, can avoid these problems. When properly drafted, the trust can provide for the distribution of income and capital on the death of the Settlor, either at some designated date in the future, or at the perpetuity period of eighty years. The Settlor can provide a Memorandum of Wishes to the Trustees which, though not legally binding, can detail the desires of the Settlor in respect of payments of income and capital to the beneficiary or beneficiaries. It can also detail any other wishes and conditions. The Trustees, at their discretion, will consider the Memorandum of Wishes as the preference of the Settlor, but not as binding written instructions.

Protection of family members

Trusts provide a useful mechanism for ensuring that the rights of the young and the infirm are catered for. For example, a Trust created for the benefit of disabled persons provides for their ultimate protection in later life, particularly if that person is an only child. It also ensures that surviving members of the family do not neglect that person’s rights in the future.

Protection from potential creditors

Trusts may be used to protect an individual from the claims of future creditors. For example, “Asset Protection Trusts” have become popular within litigious societies, where professionals can often face costly lawsuits. By settling assets into a trust, potential damage from seizure is limited.

Preserving the family fortune

A Trust can also help to preserve a family fortune by preventing later generations from dissipating the capital assets. Most parents would ultimately want their offspring to benefit from their remaining assets. However, where parents feel that their children are not capable, or do not have the degree of responsibility required to manage large sums of money, Trustees can be appointed to manage and control the assets of the Settlor. This benefits the children and protects the family wealth for future generations.

Continuing the family business

A successful entrepreneur can ensure that the business he or she has built up continues for future generations by transferring a majority shareholding in that business to a Trust. This prevents the liquidation of the business by the descendants and the Trustees can offer professional guidance to members of the family in the continuation of the business.

Employee Benefit

An employer can set up a Trust for the benefit of employees (including directors), former employees, their spouses and dependents. These are often used for the provision of lump sum payments, discretionary and deferred discretionary bonuses and loans. These tax-efficient instruments are used to motivate employees.

We welcome inquiries and will be happy to provide more in-depth information, including legislation references.

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